Intellectual Ventures Loses Its Shine: Will Its Business Model Ever Work?

from the sad-troll dept

Techdirt has always been sceptical about Nathan Myhrvold's business plan for Intellectual Ventures (IV) -- build up a huge portfolio of patents, simply so that it can then license them to those that will, and sue those that won't. Others, however, have been dazzled by Myhrvold's pedigree as an extremely wealthy ex-Microsoft manager, and by the fact that patents have undeniably become a central concern for the tech industries in recent years, which suggests that there is plenty of money to be made from them.

Around 2008 Nathan Myhrvold, Microsoft’s former chief technology officer, raised $2.9 billion in two separate funds to invest in patents and inventions. More than four years later, those funds have returned very little cash back to their investors and the returns look lousier than ever.

The article in Forbes quoted above goes on to describe one of Intellectual Venture's more recent patent-buying funds as "a complete disaster." It also notes IV's reply to these criticisms:

the firm points out the answer is that the life cycle of the firm’s funds is longer than the ten-year period usually associated with private equity-type investments. The funds are linked to the 20-year lives of the patents the funds acquire or develop.

But there's a larger issue than what the real internal rate of return is, and that's the underlying viability of Myhrvold's model. There is no evidence that IV encourages innovation in any way, despite the company's claims that it "creates a market place" for patents.

Instead, it really seems no different from your common-or-garden troll, hoping to hit the jackpot by picking up a patent that a successful company later finds it simply must license or risk going out of business. Leaving aside the morality of such an approach, it's inherently risky: IV has to hope that enough other companies come up with the actual valuable innovations that its patents can then parasitize.

The comments above could be the first straws in the wind that business opinion is starting to turn against Myhrvold. It will be interesting to see if IV starts suing companies more aggressively in an attempt to get the money rolling in -- and what it does if that fails to deliver the kind of returns investors are presumably hoping for. That could well happen if those being sued sense that IV is under pressure, and decide as a result to opt for a long, hard -- and expensive -- fight in the courts to exploit that fact.

Reader Comments

win or die

"[Failure to satisfy impatient investors] could well happen if those being sued sense that IV is under pressure, and decide as a result to opt for a long, hard -- and expensive -- fight in the courts to exploit that fact.

That cuts both ways. If IV must make a big profit soon or go under, then it has nothing to lose. If it sues me then maybe I should go to court, in the hopes that it will collapse before I lose too much money, but then again maybe I should settle, because I know that if I fight, IV can't break off the attack in the hopes of finding a weaker target tomorrow.

Re: Re: win or die

Unfortunately, that's not how it works. They can't afford ALL of their cases to be long and expensive. But that isn't what happens--what happens is that most people who receive a troll's nastygram settle, and that's what props up the troll for the occasional court battle. Some trolls fight them and some don't, but this is an insurance model--large costs are bearable for a small number, since low costs with higher returns are available from the vast majority.

One can only hope...

It could work for a while until others start making their own pools of patents that will undoubtedly overlap since the USPTO has no idea what it is granting or to whom it is granting, then they collapse under either the pressure or better litigation teams out there that will go after them to pay up too.

This cannot end well, I can't see how it will work long term, it could become something that is interment over time, it starts fades away and restarts again until it dies off again.

Re:

It seems to me that much like the real estate bubble Intellectual Property is being hyped, over inflating its actual value. What most IP believers do not seem to understand is patents are not property they are a short lived options to exclusive production. Like options on stocks and commodities their value goes to zero over time. The instant the consensus is to fight the patent trolls the bubble will burst and intellectual ventures and every other company like it will fail.

Re: Re:

This is a terrific point. I think that the reach of what you're saying goes beyond the fights in court, though. The problem is that many people see authorship and invention as ways to make money, period. In fact, the financial benefits should be secondary, or tertiary, or less. But, so, when these folks are starting out, they hope they can get by not being sued for doing things that might, say, read on an IV-held patent. But once they're more in the driver's seat, they see another potential revenue stream in suing on the IP that they now hold. Great analogy to the housing bubble, where people seemingly forgot that houses are ostensibly built to be lived in, and simply saw them as revenue streams (whether to borrow against or flip).

Psychology works against reason

Unfortunately, I think that human nature and the propensity to gamble works against any hope that IV and its business model will die.

We've all experienced it, you keep playing blackjack (or insert other game here)hands over and over way past when you should have stopped because you think you're only one hand away from the big payoff. I think that as long as there is a potential gamble that people perceive could pay off big, there will be fools pursuing it.

Intellectual Ventures primary business model

Is to monopolize as much of the world's patents as possible. They rarely if ever *sell* patents, preferring instead to lease them for the purposes of legal defense. Furthermore, they perform extensive reviews of the legal positions of those that would rent patents from IV because it is in their interest to only have those patents used in successful lawsuits, as otherwise the value of the patent is reduced or rendered null. It is my understanding that their pricing model takes this into account and charges a premium for patents in cases that are not likely to be successful or alternatively to include clauses in the lease contracts that stipulate additional fees should a court case weaken one of IV's patents.

Furthermore, IV has in many cases taken other patents in lieu of payment, again with the goal of aggregating as many patents as possible. Consider recent IP battles where both sides leased patents from IV. The company is making money coming and going. I'm not arguing that what they are doing is ethical or just, rather that they do have a solid long-term business model that will work unless we see dramatic changes to the US and international IP laws. And of course at the same time it has built its patent portfolio, IV has invested in lobbying efforts to ensure that the legal framework upon which is built continues, with any changes presumably intended to benefit the company (such as longer patent durations).

All that said, Intellectual Ventures seems to have somewhat of an identity crisis. Although often derided for merely being a PR front for the company, IV Labs, the company's real world development group has a record of trying to address serious problems through technology and use of various patents secured by the parent company. Including various efforts to contain and reduce the impact of Malaria and a variety of clean energy technologies, IVLabs looks to be doing actual good things in the world.

At the end of the day, despite lots of sketchiness, like almost everything else, IV is not pure, unadulterated evil. They have good policies and bad. The real issue is that their core business model seems to be to exploit vulnerabilities in the (primarily) US legal system. Patents seem to grant too long a monopoly to inventors, and worse often not even the inventors. They seem to be more often used to prevent innovation than protect/foster it. Many patents require a level of expertise to understand that is not reasonable nor tenable to expect from the USPTO and as a result they will continue to grant bogus and overlapping and obvious patents. The biggest issue is that so much of the world is built with an implicit assumption that patents exist and in their current form that there are honest "too big to fail" implications for making the necessary changes to promote innovation and advancement in the arts and sciences. I don't have answers, but think it's important to maintain appropriate objectivity in a world of grays.

"If people donít find what you are doing threatening, then it is probably not very important."

naysayers

It's precisely because their business model carries more risk that patent trolls are so aggressively litigious. Also, the returns on successful investments (in patent litigation) are quite high. How, therefore, is patent trolls' behavior surprising to anyone? And why do naysayers resort to criticizing the NPEs (who, frankly, don't care about your opinion), instead of pressuring their legislators or the courts to change the situation?